High-End Home Market Still in Correction Mode

(Click here (PDF) for a chart of upscale home sales.)

There are enough homes in Northwest Arkansas for sale above the $300,000 mark to serve demand for the next 20 months.
Still, builders keep building and bankers keep lending. But the new development in that high-end market seems to be wiser with a push toward more custom homes instead of speculative.
That market appears to be in solid shape, according to those who know.
“Our custom business has not slowed down one bit,” said Charles Benningfield, a million-dollar homebuilder in Bentonville. “If anything, it has improved.”
According to statistics from Streetsmart Data Services Inc., 853 homes sold for $300,000 or more in Benton and Washington counties combined in 2006. That’s down about 4.5 percent from the 893 sold in 2005, but still up 60 percent from the 532 sold in 2004.
Benton County actually saw more sales (582 in 2006, 552 in 2005) in homes $300,000 and above and that’s one reason a group of builders have decided to join forces to begin putting up “customized spec homes” in established subdivisions.
Plans call for 105 homes to be built in the exclusive Bentonville neighborhoods of Lochmoor Club and Windemere Woods over the next three years.
“There’s a lot out there, but not an oversupply of quality homes,” said Mike Payne of Payne Construction of Rogers, who’s partnering with Tall Oaks Construction and Taylor Homes, both of Bentonville, on the endeavor. “This is controlled growth. The last thing we want to be doing is helping flood the market.”
Of course, Realtors agree it’s a buyer’s market, and because of the oversupply, sellers are making deals.
However, another year similar to 2006 — when there were fewer starts than in 2005 — should balance supply with demand and return it to a builder’s market. The goal of everyone involved should be to lower absorption rates to 10 months or less in all price points, said Mike Robinson, principal broker for Exit Realty Northwest in Bentonville.
Early indications are that’s happening.
“The number of building permits has gone down the past few months and that’s a start,” said Kathy Deck, who oversees the Arvest Bank Group-commissioned Skyline Report that is complied quarterly by the Center for Business and Economic Research at the University of Arkansas.
“But certainly, looser lending practices and a plethora of capital have allowed some of the situations to develop that we see here.”
Local bankers are seeing the effects of the housing slowdown nationally, and the result has been a tighter leash on residential loans.
“The regulators are telling us to be tighter, and we are,” said Gary Kleck, executive vice president and lending manager for Parkway Bank in Rogers. “They are sensitive to the market and are very interested in what our bank is doing regarding home lending, more so than what they have in the past.”

More Correction
With bankers tightening up, more builders are customizing instead of throwing up rows of speculative homes in the upper-end market before many are sold.
Building in bunches is a way to save overhead on construction costs, but what happens after construction?
“It caused the market to hit rock bottom, basically,” said Doug Gibson, principal broker for Terminella & Associates in Fayetteville. “It’s been challenging for everyone, but now that the builders and everyone are making adjustments, there’s nowhere to go but up from here.”
Quality and pricing on existing new homes are the culprits.
Seeing potential for higher return margins, too many new-to-the-industry builders were greedy, and getting rich quick isn’t the way to stay rich too long.
Construction loans continue to mount interest and some are selling out to break even. Still, most are reluctant — or even able — to stray too far from the bottom line. That’s why some homes built in the last two years remain empty.
“When you compare shoddy workmanship with the price tag, there is certainly a disconnect there,” Deck said.
Until those builders swallow their pride — and their wallets — by lowering prices, those homes will continue to sit empty.
The effects of the oversupply has hit most every real estate firm in the area, and Robinson can’t understand why anyone would want to start new construction right now.
Robinson said one of the problems he’s seen is that fewer people are selling their homes and “moving up” to buy in a higher price point. His research through the Multiple Listing Services also shows an absorption rate of more than 20 months.
“We’ve got plenty of inventory already,” Robinson said. “Now is the time to sit on the market and sell what we’ve got. Any time the absorption rate is below 5.5 [months], it’s a builder’s market.
“But builders are making great deals now, a lot more so than what we saw three years ago.”

CustoMillion
No one wants to see more homes being built in bulk, hoping they will sell.
So instead of speculative homes, custom building is the choice.
Benningfield said when buyers are choosing their own interior and exterior, the home is already sold.
In the price range Benningfield builds, buyers ride independently of the market anyway. Millionaires usually stay millionaires and can afford new homes regardless of the economy.
Benningfield’s been building in Northwest Arkansas for 20 years and built 15 homes in the swanky Stonebriar and Talamore subdivisions. A lot of builders are intimidated by the “upscale” buyers and would rather build the home and let a Realtor do the selling.
Custom building is smarter building. The buyer often just writes a check, and the home may never even be listed for sale, because an interview and a budget estimate is usually all it takes
Where the scare comes for builders is the level of “hands on” management that comes with a custom job. More is expected of a custom builder because owners of a project may want to know details at the drop of a dime.
“One thing that gets you through the day is to answer your phone and return your calls,” Benningfield said. “If it’s a small fire, put it out before it gets any bigger.”
Maintaining a reputation as solid as your foundation is the biggest key to staying in business, Benningfield said. That’s just as important as providing that “wow” factor when someone walks into one of your homes.
Of course, the “wow” factor is what most clients want above all.
“It’s all about the details,” Benningfield said. “Not just a bunch of space with a few basic amenities.”

Dream Weavers
Not every buyer has 18 months to wait for a custom home if they’re among the 1,250 people (according to UA estimates) moving to Northwest Arkansas every month.
Most of the demand for new homes is in Benton County, while Washington County cries for more affordable homes under $300,000. According to the Skyline Report, 68 percent of the homes $300,000 and above sold in the two-county area in 2006 were in Benton County. A whopping 85 percent of the homes sold for $500,000 and above also were in Benton County.
Gibson spends half of each day in his firm’s Fayetteville office and the other half in Rogers.
He said there are areas in southwest Rogers that will be filled up soon as indicated by the seven $300,000-homes he sold there in February alone.
“There have been people on the fence for more than a year who are just now deciding to buy,” Gibson said. “And there is a need for some new starts right now, but only in certain areas of Bentonville and southwest Rogers where the subdivisions are filling up.
“It’s all about price points and location, though.”
That group of long-time local builders who are customizing 105 speculative homes in Bentonville sure hope independent MLS research by Heather Campbell of Clark Long & Associates in Fayetteville is accurate. Clark Long & Associates will be the primary listing agency for the new homes.
According to Campbell’s statistics, selecting Lochmoor Club and Windemere Woods makes perfect sense for the group that “sought each other out” because they were tired of the lack of quality of new homes. Her data deals with homes in the $350,000 to $450,000 range in Bentonville school district only.
In the last six months, 21 homes in that price range have sold. Of that 21, 12 were in Lochmoor. She also sorted for homes between $451,000 to $550,000 and found that of the eight homes that sold in that range, three were in Windemere Woods.
“These homes and neighborhoods just aren’t cookie cutters, because those aren’t selling,” Campbell said. “What we are marketing are the neighborhoods themselves and all the amenities such as basketball and tennis courts, pool areas and playgrounds, among other things.”
In Benton County, there were 30 more homes valued at $300,000 or more sold in 2006 than in the previous year.
The group also is banking on the belief that people want to live in a house that’s never been lived in before.
People want new houses. And it’s that potential that has the market still rolling strong despite a rocky year.
“Everybody wants to own a new home,” Payne said. “That’s the American dream.”